Lululemon gets a downgrade, analyst cites pricey yoga pants

An analyst at KeyBanc Capital Markets is placing his bets on Coach Inc. over Lululemon Athletica Inc. for the shaky discretionary retail sector.

“We do not dispute that Lululemon is one of the best growth stories in our coverage universe,” analyst Edward Yruma wrote in a note to clients, changing the recommendation on the stock to underweight from hold. “However we remain concerned that its high-end consumer base ($99 yoga pants) could hit the pause button.”

Mr. Yruma also said a number of companies had recently cited mediocre performance in the Canadian market, including La Senza, Children’s Place, and Abercrombie & Fitch — a market accounting for 52% of Lululemon’s sales. He gave Lululemon a price target of $38.

Coach, on the other hand, has seen its stock dive 30% from its July peak on concerns about the high-end market, but the company has conservative gross margin guidance. Lululemon has “exceedingly high near-term expectations,” he said. The analyst upgraded Coach to buy from hold, with a price target of $60.